Continuous Disclosure: Hot Topics and More

Transcription

1 The OSC SME Institute Continuous Disclosure: Hot Topics and More (for non-investment fund reporting issuers) Jonathan Blackwell Senior Accountant, Corporate Finance Marija Loubser Accountant, Corporate Finance Tamara Driscoll Accountant, Corporate Finance Ray Ho Accountant, Corporate Finance December 14, 2016

2 Disclaimer The views expressed in this presentation are the personal views of the presenting staff and do not necessarily represent the views of the Commission or other Commission staff. The presentation is provided for general information purposes only and does not constitute legal or accounting advice. Information has been summarized and paraphrased for presentation purposes and the examples have been provided for illustration purposes only. Responsibility for making sufficient and appropriate disclosure and complying with applicable securities laws remains with the company. Information in this presentation reflects securities laws and other relevant standards that are in effect as of the date of the presentation. The contents of this presentation should not be modified without the express written permission of the presenters. THE OSC SME INSTITUTE 2

3 Presentation Outline Topic Page Continuous Disclosure (CD) Review Program Overview 5 CD Review Program Results 9 Working Through a Comment Letter 17 Management s Discussion & Analysis (MD&A) 19 Disclosure Standards 43 Annual Information Form 53 Information Circular 57 Cease Trade Orders 67 Recent Initiatives 75 Upcoming Projects 89 THE OSC SME INSTITUTE 3

4 OSC SME Institute Objectives Help SMEs navigate the regulatory waters Demystify disclosure requirements so issuers can focus on building their business Help SME s to reduce their cost of compliance Provide an opportunity for informal dialogue with OSC staff Disclosure requirements, including those for technical reporting, are a cornerstone of investor confidence THE OSC SME INSTITUTE 4

5 The OSC SME Institute Continuous Disclosure (CD) Review Program Overview

6 CD Review Program Our CD review program is critical to investor protection as it monitors issuer compliance with CD obligations. We help companies understand and comply with their CD obligations through our compliance programs and issuer outreach and education initiatives. Types of reviews Full reviews are broad in scope and generally involve a detailed review of an issuer s CD record for at least 12 months. Issue-oriented reviews ( IOR ) focus on specific accounting, legal or regulatory issues that we believe warrant scrutiny. THE OSC SME INSTITUTE 6

7 CD Review Program (cont d) Issuers are generally selected for review using a risk-based approach May also select an issuer for review if: Filing appears to be substantially non-compliant with a requirement of the Act or regulations Filing appears to contain information that is misleading, false, deceptive or a misrepresentation Assess compliance with new regulatory or accounting requirements Issuers impacted by emerging risks and market conditions THE OSC SME INSTITUTE 7

8 CD Review Program (cont d) Correspondence with issuers is primarily done through comment letters Outcomes of reviews Prospective disclosure enhancements in filings Issuer outreach and education Refilings and other regulatory actions for significant deficiencies OSC s 3-year Refilings and Errors List Enforcement referral / cease trade order / default list THE OSC SME INSTITUTE 8

9 The OSC SME Institute CD Review Program Results CSA Staff Notice Continuous Disclosure Review Program Activities for the fiscal year ended March 31, 2016

10 CSA CD Staff Notice Background CD Review Program based on CSA Staff Notice (revised) Harmonized Continuous Disclosure Review Program. CSA Staff Notice contains the results of the CD reviews conducted by the CSA within the scope of their CD review program for the fiscal year ended March 31, Published July 18, continuous disclosure reviews were completed by CSA staff in fiscal 2016, of which 31% were full reviews and 69% were IORs. THE OSC SME INSTITUTE 10

11 CSA CD Review Outcomes for Fiscal % 31% 30% 32% 30% 27% 25% 23% 21% 20% 15% 10% 8% 8% 11% 9% 5% 0% Referred to Enforcement/Ceasetraded/Default list Refiling Prospective changes Education and awareness No action required THE OSC SME INSTITUTE 11

12 Issue Oriented Reviews (IORs) in Fiscal 2016 Other 27% Gender diversity 12% Press release/material change report 5% Mining Technical & Oil and Gas Disclosure 28% MD&A 9% Financial statements 8% Non-GAAP financial measures 6% THE OSC SME INSTITUTE 12

13 IORs (cont d) Across the CSA, Staff conducted the following IOR that resulted in the publication of a CSA staff notice: Gender Diversity CSA Multilateral Staff Notice , Staff Review of Women on Boards and in Executive Officer Positions Compliance with the gender diversity disclosure requirements under NI Disclosure of Corporate Governance Practices In Ontario, Staff conducted the following IOR that resulted in the publication of the following staff notice: Insider Reporting OSC Staff Notice , Report on Staff's Review of Insider Reporting and User Guides for Insiders and Issuers THE OSC SME INSTITUTE 13

14 Common Deficiencies Identified Hot Buttons Chart Includes various financial statement, MD&A and regulatory deficiencies we have encountered during our reviews. Disclosure Examples and Discussion Financial Statement Deficiencies Credit Risk disclosures MD&A Deficiencies Non-GAAP measures Venture issuers without significant revenue Other Regulatory Disclosure Deficiencies Insider reporting Oil & Gas reporting THE OSC SME INSTITUTE 14

15 The OSC SME Institute OSC CD Review Program Results OSC Staff Notice Corporate Finance Branch Annual Report

16 Ontario-Only Outcomes for Fiscal 2016 THE OSC SME INSTITUTE 16

17 The OSC SME Institute Working Through a Comment Letter Managing Interactions with Corporate Finance Staff

18 Top Practice Points 1.Comply with the noted response timeline 2.Involve the right people 3.Clarify with staff if unsure 4.Provide a fulsome response 5.Filing documents on SEDAR during comment letter process 6.Be aware of review outcomes THE OSC SME INSTITUTE 18

19 The OSC SME Institute Management s Discussion and Analysis (MD&A)

20 Background MD&A is a narrative explanation through the eyes of management which: Provides a balanced discussion of a company s results, financial condition and future prospects openly reporting bad news as well as good news Helps current and prospective investors understand what the financial statements show and do not show Discusses trends and risks that have affected or are reasonably likely to affect the financial statements in the future Provides information about the quality and potential variability of company s earnings and cash flow The MD&A should complement and supplement the company s financial statements. THE OSC SME INSTITUTE 20

21 General Considerations Focus on material information Would a reasonable investor s decision whether or not to buy, sell or hold securities of the Company likely be influenced or changed if the information in question was omitted or misstated? Yes, then likely material Explain the whys Ensure that financial information readily reconciles with financial statements Ensure that discussion reconciles with technical report, if one has been filed Use plain language THE OSC SME INSTITUTE 21

22 Annual MD&A Forwardlooking information Overall performanc e Selected annual information Risks and uncertainti es Discussions of operations Venture issuer disclosures Financial instrument s Annual MD&A Summary of quarterly results Liquidity and capital resources Change in accounting policy Off-balance sheet arrangeme nts Critical accounting estimates Proposed transaction s Fourth quarter analysis Transaction s between related parties THE OSC SME INSTITUTE 22

23 The OSC SME Institute MD&A Liquidity

24 Hot Buttons Areas Considerations Ability to generate sufficient cash Working capital requirements Is there an analysis of the company s ability to generate sufficient cash in the short term and the long term to: meet funding needs? meet planned growth? fund development activities? Are the company s working capital requirements disclosed? If a working capital deficiency exists, or is expected, is there a discussion on the company s: ability to meet obligations as they become due? plans, if any, to remedy the deficiency? Covenants Has the company disclosed where they have breached or are nearing a breach of a covenant? If the company is in breach or nearing breach of a financial covenant, is there a discussion on the company s: Plans, if any, to cure the default or address the significant risk of default? THE OSC SME INSTITUTE 24

25 Example of Boilerplate Disclosure Working Capital Requirements Identifies working capital deficiency No explanation of how deficiency will be remedied No explanation of how they will meet obligations At year end, the company had cash of $10,000, total current assets of $500,000 and total current liabilities of $700,000. This resulted in a working capital deficiency of $200,000. Nonetheless, management is confident that the company has adequate financial resources to address its requirements and can arrange alternative sources of financing, if necessary. THE OSC SME INSTITUTE 25

26 Example of Entity-specific Disclosure Working Capital Requirements Ability to generate cash Ability to meet working capital obligations Expected sources of funds The company, which is involved in early stage exploration, has no sources of revenue and does not anticipate receiving revenue in the foreseeable future. At year end, the company had cash of $10,000, total current assets of $500,000 and total current liabilities of $700,000. This resulted in a working capital deficiency of $200,000. Subsequent to year end, the company has entered into an agreement to borrow an additional $3 million from shareholders to meet current and future working capital requirements. In the short term, the company intends to principally rely on advances from shareholders and the exercise of options to fund operating costs. However, there is no assurance that shareholders will advance a sufficient amount of funds to the company or that a sufficient number of options will be exercised. THE OSC SME INSTITUTE 26

27 Example of Entity-specific Disclosure Working Capital Requirements (cont d) The company is also exploring other financing alternatives to address both its short term operating and long term financing requirements, such as optioning out interests on its properties and the sale and leaseback of capital assets. Cash burn rate Working capital / capex requirements The company s monthly cash operating costs are approximately $100,000. In addition, in accordance with the provisions of the option agreement with Explorco, the company must spend $25,000 per month for each of the next 12 months in order to exercise its option to acquire a 50% interest in the ABC property. If it is unable to meet its exploration obligations, it will lose its interest in the property. The company has also budgeted $650,000 to conduct exploration on its WXY Property over the next 12 months. THE OSC SME INSTITUTE 27

28 Example of Boilerplate Disclosure Covenants Identifies what the covenant is linked to Identifies the Company is close to breaching No discussion on how the Company plans to address the Potential default At September 30, 2016, the Company had drawn $10 million of the loan facility (Q $4.5 million). The Company is required to maintain certain covenants with the bank and is close to breaching those covenants as at September 30, THE OSC SME INSTITUTE 28

29 Example of Entity-specific Disclosure Covenants Identifies what the covenant is Identifies the Company is close to Breaching and quantifies the ratio Discussion on how the Company plans to address the Potential default At September 30, 2016, the Company had drawn $10 million of the loan facility (Q $4.5 million). The Company is required to maintain certain covenants with the bank and is close to breaching those covenants as at September 30, The financial covenant is the Company s debt to equity ratio, which must be less than 0.8. The current calculation results in a ratio of The Company is currently in discussions with the bank to waive the covenant; if the bank cannot waive the covenant, the Company will use the proceeds of the ABC disposition to reduce its debt, and in turn, reduce the debt to equity ratio. THE OSC SME INSTITUTE 29

30 The OSC SME Institute MD&A Non-GAAP Financial Measures

31 What are Non-GAAP Financial Measures? A non-gaap financial measure (NGM) is defined in CSA Staff Notice : Numerical measure of an issuer s historical or future financial performance, financial position or cash flow NGMs are not specified, defined or determined under the issuer s GAAP Exclude amounts that are included in or include amounts that are excluded from the most directly comparable GAAP measure In other words, non-gaap financial measures are not based on generally accepted accounting principles (GAAP) Examples commonly include: EBITDA Free Cash Flow Adjusted Earnings Per Share THE OSC SME INSTITUTE 31

32 1. Does the disclosure explicitly state that there is no standardized meaning of the non-gaap financial measure? Company #1 Company #2 Company #3 Net income + interest + taxes + depreciation and amortization = EBITDA - Other income + Deemed interest on operating leases + Severance, acquisition, and other costs + Interest on postemployment benefit obligations + Other expenses + Impairment of retail assets held for sale + Labour agreements + Inventory measurement differences + Fixed asset impairment - Modified franchise fees + Pension annuities - FV adjustment on fuel and FX contracts - Restructuring costs = Adjusted EBITDA THE OSC SME INSTITUTE 32

33 2. Has the non-gaap financial measure been named in a way that distinguishes it? EBITDA excludes more than just I-T-D-A ABC Co. Consolidated Income Statement For the year ended December 31 (millions $CDN) 2015 Operating revenues 7,000 Operating costs ( 3,000) EBITDA 4,000 Depreciation and amortization ( 1,200) Severance, acquisition, and other costs ( 275) Interest expense ( 450) Expected return on pension plan assets 300 Other income (expense) 60 Earnings before income taxes 2,435 Income taxes ( 245) Net earnings 2,190 THE OSC SME INSTITUTE 33

34 3. Has the company disclosed: (a) why the non-gaap financial measure is useful to an investor? (b) why management considers the non-gaap financial measure to be useful? Comparable EBITDA Adjusted EBITDA EBITDAR Funds from Operations Organic Revenue Adjusted Funds from Operations EBITDA Adjusted Earnings Adjusted Sales per Square Foot EBITDARM Normalized EBITDA Core EBITDA THE OSC SME INSTITUTE 34

35 4. Has the comparable GAAP measure been presented with equal or greater prominence to the non-gaap financial measure? 5. Is a reconciliation between the non-gaap financial measure and the most directly comparable GAAP measure provided? Results of Operations for the year ended December 31, 20XX December 31, 20XX Revenues 2,000,000 Cost of Goods 1,000,000 Gross margin 1,000,000 SG&A expenses 200,000 Adjusted EBITDA EBITDA Reconciliation December 31, 20XX 800,000 EBITDA 700,000 Net income 200,000 Net income 200,000 Interest 50,000 Depreciation 200,000 Amortization 200,000 Taxes 50,000 EBITDA 700,000 THE OSC SME INSTITUTE 35

36 6. Are adjustments described as nonrecurring, infrequent or unusual, when a similar loss or gain is reasonably likely to occur within the next two years or occurred during the prior two years? 7. If composition of the non-gaap financial measure has changed from the previous year, has disclosure of the reasons for these changes been made? THE OSC SME INSTITUTE 36

37 Types of Potential Non-GAAP Financial Measure Deficiencies Potential Deficiencies Measures that are presented with greater prominence than GAAP measures Measures that spotlight the good and play down the bad Multiple measures used and explanation of why they are used is not sufficient Examples Disclose non-gaap measure in press releases without providing the most directly comparable GAAP measure in the press release. Disclose positive adjusted working capital, calculated by excluding a negative net nonfinancial assets/liabilities amount, when the company has a working capital deficit. Disclose more positive adjusted operating cash flow, by excluding certain negative amounts. Disclosing multiple non-gaap measures with no clear reason for why they provide useful information can convolute the MD&A. THE OSC SME INSTITUTE 37

38 Non-GAAP Financial Measures Example #1 Prominence placed on non-gaap measures Only discusses adjusted EBITDA Highlights the positives of the adjusted EBITDA The Company achieved record financial results and met its financial targets. Adjusted EBITDA 1 which excludes the impact of interest, taxes, depreciation, amortization and restructuring charges totaled $65 million in 2015, an increase of 12% from $59 million in The year-over-year increase in adjusted EBITDA is attributable to lower cash operating expenses, primarily from synergies achieved in the Company s cost structure. 1 Refer to the Non-GAAP financial measures section on page X for more information about this measure and for a reconciliation of the NGM to the most directly comparable GAAP measure. THE OSC SME INSTITUTE 38

39 Non-GAAP Financial Measures Example #2 Equal prominence placed on GAAP measures Discussion of net income comes before adjusted EBITDA Variance analysis is focused on GAAP measure The Company s net income for the year decreased by 32% to $44 million ( $65 million). The year-over-year decrease in net income is attributable to an increase in amortization and depreciation of $6.5 million due to a reduction in the estimated useful life of certain IT systems, and a restructuring charge of $15 million related to Company-wide efforts to improve efficiencies and centralize certain processes. Adjusted EBITDA 1, which excludes the impact of interest, taxes, depreciation, amortization and restructuring charges totaled $65 million in 2015, an increase of 12% (2014 $58 million). 1 Refer to the Non-GAAP financial measures section on page X. for more information about this measure and for a reconciliation of the NGM to the most directly comparable GAAP measure. THE OSC SME INSTITUTE 39

40 Non-GAAP Financial Measures Example #1 Boilerplate explanation of non-gaap financial measure Does not indicate why the measure is useful to investors Does not provide a fulsome explanation of why management uses the measure Adjusted EBITDA is a non-gaap financial measure, which is defined as earnings before income tax expense, financing costs, depreciation and amortization, and impairment charges. In management s opinion, Adjusted EBITDA is the most useful measure of performance because it provides a normalized picture of financial condition. THE OSC SME INSTITUTE 40

41 Non-GAAP Financial Measures Example #2 Fulsome explanation of non-gaap financial measure Describes in detail why management uses the measure, and also includes a description of why the measure is useful to investors. Adjusted EBITDA is a non-gaap financial measure, which is defined as earnings before income tax expense, financing costs, depreciation and amortization, and impairment charges. Management believes that Adjusted EBITDA is an important indicator of the Company s ability to generate liquidity through operating cash flow to fund future working capital needs, service outstanding debt, and fund future capital expenditures and uses the metric for this purpose. The exclusion of impairment charges eliminates the non-cash impact. Adjusted EBITDA is also used by investors and analysts for the purpose of valuing a company. The intent of Adjusted EBITDA is to provide additional useful information to investors and analysts and the measure does not have any standardized meaning under IFRS. Adjusted EBITDA should therefore not be considered in isolation or used in substitute for measures of performance prepared in accordance with IFRS. Other companies may calculate Adjusted EBITDA differently. THE OSC SME INSTITUTE 41

42 Non-GAAP Financial Measures Other The non-gaap financial measures guidance set out in CSA SN (Revised) are applicable to all continuous disclosure documents, as well as website materials and investor presentations Non-GAAP forward-looking information (FLI) is subject to the FLI requirements in Part 4A and 5.8 of National Instrument Continuous Disclosure Obligations SEC published helpful compliance and disclosure interpretations on the use of non-gaap financial measures in May 2016 In December 2013 Ontario staff published a staff notice on our review of these measures (OSC Staff Notice ) THE OSC SME INSTITUTE 42

43 The OSC SME Institute National Policy Disclosure Standards

44 National Policy Disclosure Standards In addressing the importance of effective disclosure practices, National Policy includes a discussion of the following themes: Timely disclosure, including material change reporting Prohibition against selective disclosure The importance of balanced disclosure Determining whether events are material Other best disclosure practices THE OSC SME INSTITUTE 44

45 Timely Disclosure When is timely disclosure, as opposed to continuous disclosure, required? What is the definition of a material change? What is required when a material change occurs? Press release immediately upon information becoming known to management Material change report within 10 days A material change includes a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer. THE OSC SME INSTITUTE 45

46 Selective Disclosure Securities legislation prohibits a reporting issuer and any person or company in a special relationship with a reporting issuer from informing, other than in the necessary course of business, anyone of a material fact or a material change before that material information has been generally disclosed. How is the generally disclosed requirement satisfied? For material changes For other material information, such as a material fact How can information which is neither a material change nor a material fact be disclosed? A material fact includes a fact that significantly affects, or would reasonably be expected to have a significant effect on, the market price or value of securities. THE OSC SME INSTITUTE 46

47 Balanced Disclosure Balanced Disclosure should include the following: It should be factual and balanced Unfavorable news should not be withheld Unfavorable news should be given no less prominence than favorable news It should contain enough detail for investors to understand the substance of the issue Balanced disclosure should not include: Unnecessary detail Exaggerated reports or promotional commentary Unbalanced disclosure often lacks a discussion of: Risks & uncertainties Contingencies Costs & barriers THE OSC SME INSTITUTE 47

48 Balanced Disclosure (cont d) CSA Staff Notice Staff Review of Issuers Entering Into Medical Marijuana Business Opportunities Discussion of balanced disclosure concerns applicable to issuers in all industries OSC Staff Notice Corporate Finance Branch Annual Report Importance of disclosures conveyed by issuer s outside of their normal continuous disclosure filings Press releases Investor presentations Website materials Social media websites THE OSC SME INSTITUTE 48

49 Balanced Disclosure (cont d) Example #1 - Unbalanced disclosure No discussion of risks or contingencies Promotional in the absence of additional detail re the terms of the arrangement On October 3, 2016 the Company signed a letter of understanding with a major retail company listed on the London stock exchange. The agreement has a 10 year term and is anticipated to result in up to $1 billion in sales of the Company s products over that term. THE OSC SME INSTITUTE 49

50 Balanced Disclosure (cont d) Example #2 - Balanced disclosure Additional detail about arrangement terms Risks and contingencies On October 3, 2016 the Company signed a non-binding letter of understanding with a major retail company listed on the London stock exchange. The agreement has a 10 year term. Under the agreement, the potential customer has indicated its interest to purchase up to $1 billion of the Company s products over the 10 year term. Product specifications and customization on behalf of the customer will continue to be developed over the next 6 months or longer. There can be no assurance that an agreement on product specifications, or subsequently a binding definitive sales arrangement, will be reached. If they are reached, there is no guarantee that any specific amount of product will be sold. The potential customer has made no firm commitment to purchase any of the Company s products at this time. The $1 billion figure noted above is based on an indication of anticipated demand as provided by the potential customer. The Company is not in a position to verify such estimate, or the potential customer s ability to absorb such demand. THE OSC SME INSTITUTE 50

51 Determining Whether Events Are Material Examples of potentially material information are provided in National Policy Disclosure Standards. Changes in corporate structure Changes in capital structure Changes in financial results Changes in business and operations Acquisitions and dispositions Changes in credit arrangements This list is not exhaustive. Issuers should exercise judgment in making materiality determinations. THE OSC SME INSTITUTE 51

52 Other Best Disclosure Practices Establishing a corporate disclosure policy Analyst reports Insider trading policies and blackout periods Overseeing and coordinating disclosure THE OSC SME INSTITUTE 52

53 The OSC SME Institute Form F2 Annual Information Form Risk Factor Disclosure

54 Annual Information Form Purpose and content of an Annual Information Form Commonly observed disclosure deficiencies: Hot topic Description of the business Description of the business Risk factors Risk factors Risk factors Risk factors Guidance Include sufficient detail, as well as a robust discussion of each operating segment identified in the financial statements. Provide information on various aspects of the business, including but not limited to production and services, specialized skills and knowledge, competitive conditions, new products, economic dependence and changes to contracts. If a particular risk, for example cash flow and liquidity, has become particularly prevalent in the current year then issuers should update their disclosure to address this change. Risks should be listed in order of seriousness with the most serious risks listed first. Disclose strategies to manage risks, but avoid de-emphasizing a risk factor. Risk factors should include sufficient detail and they should be entity specific not generic. The potential impact of the risk (qualitative and/or quantitative) should be disclosed. THE OSC SME INSTITUTE 54

55 Annual Information Form (cont d) Example #1 - Boilerplate risk factor disclosure Additional entity specific information could be provided De-emphasizing or qualifying language 60% of the Company s revenues are generated by Downstream Corporation, a wholly owned subsidiary of the Company which was acquired in March of the current year. 50% of the revenues of Downstream Corporation are derived from a single customer. Our business would be materially adversely impacted if such customer went to a competitor. As a result of the Company s strong relationship with this customer, and based on our discussions, the risk of loosing this customer in the foreseeable future is remote. THE OSC SME INSTITUTE 55

56 Annual Information Form (cont d) Example #1 - Entity specific risk factor disclosure Additional entity Specific detail Strategies to mitigate the risk Qualifying language removed 60% of the Company s revenues are generated by Downstream Corporation, a wholly owned subsidiary of the Company which was acquired in March of this year. 50% of the revenues of Downstream Corporation are derived from a single customer, who was the former owner of Downstream Corporation prior to it being acquired by the Company earlier this year. Prior to the Company s acquisition of Downstream Corporation earlier this year, the customer had an economic incentive to purchase goods from Downstream Corporation as they were the owner of Downstream Corporation at that time. Given that this individual no longer owns Downstream Corporation, there is a risk that they we may not be able to retain their business. While the Company is in the process of negotiating pricing with this customer under a long term contract structure, no agreement has been reached at this time and there is no assurance that one will be reached. The Company has a strong relationship with this customer. Our business would be materially adversely impacted if such customer went to a competitor. As a result of the Company s strong relationship with this customer, and based on our discussions, the risk of losing this customer in the foreseeable future is remote. THE OSC SME INSTITUTE 56

57 The OSC SME Institute Form F5 Information Circular

58 Information Circular Regulatory hot topics relating to the preparation of an information circular: Hot topic When is prospectus level disclosure required in a circular? Executive compensation disclosure compensation discussion and analysis. Executive compensation disclosure all compensation disclosed. Guidance Circulars prepared in connection with a share acquisition or a restructuring transaction (including a reverse takeover, merger, amalgamation) require prospectus level disclosure. See item 14.2 of Form F5. Provide an entity specific narrative overview that explains how and why the company arrived at specific compensation decisions and policies. Describe and explain all significant elements of compensation. All direct and indirect compensation provided in connection with services provided to the company (or one of its subsidiaries) must be disclosed. THE OSC SME INSTITUTE 58

59 Executive Compensation Disclosure Compensation Discussion and Analysis General Requirements Describe & explain all significant elements of compensation in order to put in to perspective the executive compensation disclosure that follows, including quantitative disclosures. Focus on how and why compensation decisions were arrived at, including: The objectives of any compensation program or strategy What the compensation program is designed to reward How the company determines the amount for each element How each element of compensation and the company s decisions about that element fit into the company s overall compensation objectives Each element of compensation and why the company chooses to pay each element THE OSC SME INSTITUTE 59

60 Executive Compensation Disclosure (cont d) Compensation Discussion and Analysis Benchmarking The compensation discussion and analysis should describe any benchmark group used, including its components (ie. which companies were included in the benchmark group, why were they included and how are they considered to be relevant). Examples of relevant selection criteria for benchmarking may include: Geography or country where the benchmark company is located Similar industry Similar revenue range Similar market capitalization range Others entities which the company competes with for executive talent THE OSC SME INSTITUTE 60

61 Executive Compensation Disclosure (cont d) Example #1 Boilerplate benchmarking disclosure No discussion of how the benchmark Is used Benchmark group is not disclosed The CEO s compensation is based upon compensation ranges for comparable positions at other TSX listed entities, or on directly comparable companies in the industry. THE OSC SME INSTITUTE 61

62 Executive Compensation Disclosure (cont d) Example #1 Entity specific benchmarking disclosure Describes selection criteria Describes how benchmark is used Lists benchmark group The CEO s compensation is based upon compensation ranges for comparable positions at publicly traded, TSX-listed companies or directly comparable companies in the industry. The criteria considered for the selection of comparator or peer group of companies was total revenue, market capitalization and net income. The benchmark group is used by the company to confirm whether the company has established comparable executive compensation levels to their peers. The Company s compensation is positioned at the median of its peer group and is consistent with the Company s stated compensation philosophy. The list of comparable companies that the Compensation Committee reviewed consisted of the following: ABC Co. XYZ Ltd. Peanut Co. Almond Ltd. THE OSC SME INSTITUTE 62

63 Executive Compensation Disclosure (cont d) Disclosing Performance Goals or Other Similar Conditions Disclose performance goals or similar conditions that are based on objective, identifiable measures, such as the company s share price or earnings per share. If based on non-gaap financial measures, explain how the company calculates these performance goals from its financial statements. If performance goals or similar conditions are subjective, the company may describe the performance goal or similar condition without providing specific measures. Examples of subjective measures may include milestones, agreements or transactions. Discuss how any performance goals link to actual compensation awarded. THE OSC SME INSTITUTE 63

64 Executive Compensation Disclosure (cont d) Example #2 Boilerplate disclosure of performance goals No quantification of objective measures No disclosure of achievement of measures In determining annual bonuses under the short term incentive plan and long term incentive plan, the Board takes into consideration both corporate and individual performance measures of the NEO. 50% of the STIP is based on achievement of specific corporate performance measures such as net earnings, share price performance, among others, and the remaining component relates to the individual performance of the NEO, which is more subjective and is based on individual measures established at the beginning of the year. THE OSC SME INSTITUTE 64

65 Executive Compensation Disclosure (cont d) Example #2 Entity specific disclosure of performance goals In determining annual bonuses under the short term incentive plan and long term incentive plan, the Board takes into consideration both corporate and individual performance measures of the NEO. The Compensation Committee does not have discretion to award the short term incentive component without attainment of relevant individual and corporate performance goals. Under the terms of the plan, the NEO s maximum short term incentive as a percentage of base salary is 50%. The following is the structure and objectives for the NEO s short term incentive program: Corporate Performance Financial Measures (50% of total) Performance Measure Relative Weighing Achievement in Fiscal Year Net Earnings above $XX million 15% XX% Share price performance above XX% 10% XX% Cash Flow from Operations > $XX million 10% XX% Growth of sq. footage of leasing 15% XX% THE OSC SME INSTITUTE 65

66 Executive Compensation Disclosure (cont d) Disclosing All Elements of Compensation If an external management company provides executive management services to the company directly or indirectly, disclose: Any compensation that the external management company paid to the individual that is attributable to services provided to the company directly or indirectly If the management company allocates the compensation paid to an NEO or director, disclose the basis or methodology used to allocate this compensation. THE OSC SME INSTITUTE 66

67 The OSC SME Institute Cease Trade Orders

68 Cease Trade Orders (CTO) National Policy Failure-to-File Cease Trade Orders and Revocations in Multiple Jurisdictions What is a specified default? Failure to file the following documents within the time period prescribed Annual or interim financial statements Annual or interim MD&A Annual information form Certification of filings under NI How do regulators respond to specified defaults? Failure-to-File CTO (FFCTO) Management Cease Trade Order (MCTO) Issuer should make sure that it continues to satisfy all of its other continuous disclosure obligations during the period of default THE OSC SME INSTITUTE 68

69 Management Cease Trade Orders (MCTO) National Policy Management Cease Trade Orders How is a MCTO different than a CTO? Voluntary process Insiders and management subject to CTO rather than issuer All other investors can continue trading We will consider granting an MCTO if all of the following apply: The outstanding filings will be filed within a reasonable period The issuer is generating revenue from its principal business or is actively pursuing the development of products or properties The issuer has necessary financial and human resources in place to address the default and comply with other CD requirements for the duration of the default The issuer s securities are listed on a Canadian stock exchange and there is an active liquid market for the securities The issuer is not on defaulting RI list in any jurisdiction THE OSC SME INSTITUTE 69

70 Management Cease Trade Orders (MCTO) (cont d) Application Two weeks prior to filing deadline News Release and Material Change Report (Default Announcement) Issue immediately to marketplace when an issuer determines that it will not comply, or subsequently determined that it has not complied, with a specified requirement NP identifies information to include in Default Announcement Default Status Reports Bi-weekly status reports issued by way of news release NP identifies information to include in bi-weekly status reports THE OSC SME INSTITUTE 70

71 Revoking a FFCTO (in effect for less than 90 days) Staff will generally revoke a FFCTO if within 90 days of the date of the FFCTO the default is remedied and the issuer s continuous disclosure is brought up to date Formal application and application activity fees are not required Participation fees and late fees still apply! THE OSC SME INSTITUTE 71

72 Revoking a FFCTO (in effect for more than 90 days) Application Fee Full Revocation Compliance Review Outstanding continuous disclosure has been filed Outstanding fees are paid Annual meeting News release announcing revocation and future plans s. 144 of the Securities Act (Ontario) The Commission may make an order revoking or varying a decision of the Commission, on the application of the Executive Director or a person or company affected by the decision, if in the Commission s opinion the order would not be prejudicial to the public interest THE OSC SME INSTITUTE 72

73 Revoking a FFCTO (in effect for more than 90 days) (cont d) National Policy Revocation of a Compliance-related Cease Trade Order Generally issued prior to June 23, 2016 FFCTOs do not include a reference to NP File application in each jurisdiction that has issued a FFCTO National Policy Failure-to-File Cease Trade Orders and Revocations in Multiple Jurisdictions Generally issued after June 23, 2016 FFCTOs include a reference to NP File application with Ontario or principal regulator and ON Applications submitted through OSC s electronic filing portal THE OSC SME INSTITUTE 73

74 Partial Revocation of a FFCTO Partial Revocation To permit certain transactions Issuer intends to apply for a full revocation Use of proceeds Conditions to partial revocation acknowledgement and copies of FFCTO and revocation Continuing effect of FFCTO THE OSC SME INSTITUTE 74

75 The OSC SME Institute Recent Initiatives

76 The OSC SME Institute Venture Issuer Regulation Amendments to NI , NI , and NI

77 Why Did the Rules Change? Targeted changes Recognize stage of development Reduce burden What Changed? MD&A quarterly highlights Business acquisition reporting Executive compensation disclosure Prospectus disclosure Audit committee requirements THE OSC SME INSTITUTE 77

78 MD&A Quarterly Highlights Tailored and focused Discusses material information Only for interim periods Optional THE OSC SME INSTITUTE 78

79 Expectations for Quarterly Highlights Where to start? Remember the goal of MD&A Keys to success Focus only on material information Balanced and accurate Narrative How will success be measured? Will investors understand the business? Operating milestones Liquidity and capital resources THE OSC SME INSTITUTE 79

80 Business Acquisition Reporting Significance threshold moving from 40% to 100% Requirement for pro forma financial statements removed Consistent approach among filing types THE OSC SME INSTITUTE 80

81 Executive Compensation New optional venture issuer form (Form F6V) Disclosure for three NEOs instead of five Information covers only two years No grant date fair value THE OSC SME INSTITUTE 81

82 Prospectus Changes Reduce annual F/S history from three to two years Harmonize: MD&A BAR Executive compensation THE OSC SME INSTITUTE 82

83 Audit Committee Changes Enhanced Governance Requirements Alignment with existing TSXV requirements THE OSC SME INSTITUTE 83

84 Timing and Use of Amendments To Date Amendments to venture issuer reporting as are currently in effect Things we have seen: Not making use of the Quarterly Highlights Not providing a focused discussion THE OSC SME INSTITUTE 84

85 The OSC SME Institute CSA Multilateral Staff Notice Year 2 Staff Review of Women on Boards and in Executive Officer Positions Compliance with National Instrument Disclosure of Corporate Governance Practices. The OSC SME Institute

86 CSA Multilateral Staff Notice Reported on compliance with the corporate governance requirements related to women on boards by 677 TSX listed issuers Reported on year over year changes since the publication of our last staff notice. Objectives: Increase transparency Encourage more effective boards and better decision making Application: Non-venture issuers THE OSC SME INSTITUTE 86

87 Corporate Governance Disclosure Requirements Number and proportion of women on boards and in executive officer positions Director term limits and other mechanisms of board renewal Policies regarding the representation of women on the board Director identification and selection process Executive officer appointments Targets THE OSC SME INSTITUTE 87

88 Key Findings 55% have at least one women on their board up from 49% 59% have at least one women in an executive officer position based on the issuers that reported, compared to 60% last year Women hold 12% of all board seats compared to 11% last year Of the 521 board seats that were vacated last year, 76 were filled by women THE OSC SME INSTITUTE 88

89 The OSC SME Institute Upcoming Projects

90 Reducing regulatory burden CSA Business Plan Review requirements applicable to reporting issuers to: Identify areas that would benefit from a reduction of any undue regulatory burden Seek to streamline these requirements without reducing investor protection or the efficiency of markets Securities regulators are facing growing pressures to respond appropriately to market issues while avoiding over-regulation While regulators have always focused on the need for regulatory balance, that focus has been magnified by the current market environment, which has impacted many market participants THE OSC SME INSTITUTE 90

91 Reducing regulatory burden (cont d) Recent policy initiatives to support public market Liberalized the prospectus marketing regime by increasing the range of permissible pre-marketing and marketing activities in connection with public offerings Introduced new exemptions for use by reporting issuers and amended or harmonized certain existing prospectus exemptions available to reporting issuers Tailored disclosure and other requirements to benefit venture issuers in the prospectus, continuous disclosure and governance regimes Ongoing initiatives Reviewing the current resale regime for prospectus-exempt securities Creating a new national filing system to replace the core CSA national systems THE OSC SME INSTITUTE 91

92 Appendix Key References and Contact Information

93 Appendix A Key References Topic Reference MD&A Form F1 of NI Continuous Disclosure Obligations MD&A: Liquidity Item 1.6 of Form F1 of NI Continuous Disclosure Obligations Non-GAAP Financial Measures CSA Staff Notice (Revised) Non-GAAP Financial Measures OSC Staff Notice Report on Staff s Review of Non-GAAP Financial Measures and Additional GAAP Measures Forward Looking Financial Information CSA Staff Notice Forward Looking Information Disclosure Disclosure Standards National Policy Disclosure Standards Venture Issuer Regulation NI Continuous Disclosure Obligations, NI General Prospectus Requirements and NI Audit Committees Women on Boards CSA Multilateral SN , NI Disclosure of Corporate Governance Practice THE OSC SME INSTITUTE 93

94 Appendix B Contact Information Contact Information General OSC Contact Centre inquiries@osc.gov.on.ca Phone: or Eden Williams Financial Examiner Supervisor, Corporate Finance Sheryl Antonio Financial Examiner (# - Es), Corporate Finance Sonia Castano Financial Examiner (Et O), Corporate Finance Amy Fraser Financial Examiner (P Z), Corporate Finance ewilliams@osc.gov.on.ca Phone: santonio@osc.gov.on.ca Phone: scastano@osc.gov.on.ca Phone: afraser@osc.gov.on.ca Phone: THE OSC SME INSTITUTE 94

95 Appendix B Contact Information (cont d) Contact Information Corporate Finance Marija Loubser Accountant Jonathan Blackwell Sr. Accountant Tamara Driscoll Accountant Ray Ho Accountant mloubser@osc.gov.on.ca Phone: jblackwell@osc.gov.on.ca Phone: tdriscoll@osc.gov.on.ca Phone: rho@osc.gov.on.ca Phone: THE OSC SME INSTITUTE 95